Big money passes through the foreign exchange market.
With a daily turnover into the trillions of dollars, the international foreign exchange system is the largest market in the world. It brings together a diverse array of central banks, financial institutions and investors who all use Forex for different reasons.
History
The modern foreign exchange system can trace its history back to 1944's Bretton Woods Agreement, which paved the way for a new system of global currency exchange among the soon-to-be-victorious Allied powers.
Participants
The major participants in the foreign exchange market are central banks, like the U.S. Federal Reserve and European Central Bank, large financial institutions like commercial and investment banks, multinational corporations, and investors of varying shapes and sizes.
Purpose
The main purpose of the foreign exchange market is to facilitate rapid, easy and transparent buying and selling of currency between thousands of different parties. Central banks use the foreign exchange system to try to smooth governmental debt offerings and manipulate currency values. Banks and financial institutions use the Forex system to earn fees by providing brokerage, clearing and hedging services to clients like multinational corporations. Multinational corporations use Forex in efforts to offset their business risk in foreign countries. And investors use Forex to try to achieve capital gains by buying currencies expected to go up, and selling currencies expected to go down.
Effects on Forex Values
The economic circumstances of a particular country tend to play the strongest role in how its currency is valued in the Forex market. Economically strong countries tend to have a strong currency, while those ravaged by inflation, depression or political uncertainty tend to have weak currencies. Other important factors are money supply, global investment flows and interest rate trends. Some export-dependent countries like Japan seek to deliberately keep the value of their currency low to make their exports cheap.
Products
There are a variety of different investment products in use in the foreign exchange market. The most prominent are spot currency contracts, futures contracts, options contracts and a variety of "over-the-counter" custom-made derivatives.
